Richard Posner, a judge on the federal Seventh Circuit Court of Appeals, is someone who's both brilliant and wise in the ways of the world. He's always worth giving an ear to.
His review of Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism contains some of Judge Posner's observations on the current recession. Here's one passage that particularly struck me:
Cheap credit and soaring house values were the immediate causes of the bubble and of all that followed when it burst. The underlying causes were the deregulation of financial services; lax enforcement of the remaining regulations; unsound decisions on interest rates by the Federal Reserve; huge budget deficits; the globalization of the finance industry; the financial rewards of risky lending, and competitive pressures to engage in it, in the absence of effective regulation; the overconfidence of economists inside and outside government; and the government's erratic, confidence-destroying improvisational responses to the banking collapse. [Emphasis added.]
I've been highly resistant to the "it was deregulation, stupid" story line that left-leaning commentators have been pushing. (In my view, "bad regulation" is much more accurate in the current circumstances than "deregulation.") But Judge Posner is a careful writer and says just what he means. He traces the crisis to a combination of causes, including "deregulation of financial services."
As I've mentioned before, I am really looking forward to Judge Posner's forthcoming book on the recession.